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Investors Prepare for Cruel Summer

May was a great month if you're a bear. By its close the Dow's monthly loss totaled 8%; that's the worst May drop since 1940.

Friday's action looked a lot like most other days this month, with the Dow and S&P sharply lower.

The latest headwinds were due to a downgrade. Fitch reduced Spain's rating by one notch saying the country's economic recovery will be "more muted" than the government forecast due to its austerity measures.

Although the move wasn’t terribly shocking, it reignited worries about the overseas financial crisis and whether troubles in Europe would lead to a global slowdown.

It definitely spooked the market, no doubt about it, says Terry Morris of National Penn Investors Trust in a Reuters interview. Up until now it's been mostly Greece and the threat of Spain and Portugal and Ireland. With Fitch actually downgrading Spain, it seems as if it is no longer a hypothetical, the contagion is now real.

Are we looking at a cruel summer?

Strategy Session with the Fast Money traders

Action in the market is all technically based, explains Steve Grasso of Stuart Frankel. I’m watching 1115 on the S&P; that’s flat on the year. If we see the S&P hit that level I think we see buying.

I didn’t think the market’s action was impressive at all on Friday and still think the next leg is lower, says Guy Adami. Had the market closed above 1110 I would feel differently, but it didn’t and I don't.

It’s been a very sloppy market and hedge funds are getting defensive, explains Anthony Scaramucci of Skybridge. If you're looking for ideas look at Pfizer , Merck, or Altira for their dividend yield.

In this market I like low volatility stocks such as Kraft , Bristol Myers and Campbell Soup, adds Patty Edwards of Storehouse. And as a hedge I’m long the Vix, she adds. I just don’t like the market action. I also expect that the path of least resistance is lower.

To me the market is showing a little bit of strength, and I’m cautiously bullish, reveals Joe Terranova. I'm looking at long positions in slow movers such as Teva, Pfizer , CVS and Best Buy . I think health care and consumer staples will likely benefit as portfolio mangers put money to work at the beginning of June.

I also thought the market action was encouraging, adds Brian Kelly of Kanundrum. I think we could see a 5% rally in June. Over the next few weeks I’m somewhat bullish. But that’s largely because I also think money managers will be chasing performance into the end of the quarter on June 30th.

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DID EURO BOTTOM?

The euro fell once again on Friday after Fitch cut Spain's credit rating. For the month the beleaguered currency is off by more than 7%.

What’s the trade?

I think the euro has bottomed in the near term, says Brian Kelly. I’m looking at 121.40 as support. But around 126 I’d be a seller. Nothing has changed fundamentally.

I’m also longBanco Santander which I think was oversold, Kelly adds. But it’s a trade.

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BP CRISIS

Investors slammed BP again on Friday bringing its monthly drop to over 25% as the spill in the gulf became the worst in US history.

BP's chief executive cautioned Friday that it will be two more days before anyone knows if the latest fix attempt will stop the oil spewing into the sea, and that there are no guarantees the so-called "top kill" being tried for the first time 5,000 feet underwater will work.

Meanwhile, BP said the cost of the disaster now was $930 million. The cost is sure to multiply with clean-up of the spill, which has surpassed the Exxon Valdez disaster off the Alaska coast in 1989.

What’s the trade?

I really think BP is oversold, says Steve Grasso, and I’m a buyer.

I’m also long BP, reveals Patty Edwards but you must have a long term time horizon. If you can put it away I think it’s a good play.

I wouldn’t touch BP, counters Anthony Scaramucci. They’re looking at a world of pain.

I’m seeing investors stepping out of energy names here in the US and looking at companies in Canada, says Joe Terranova. I’d look at Suncor. Also I think natural gas is a sleeper and I’d play it long XCO , Apache and SWN.


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JUNE'S BIG STORY: GOLDMAN SEC SETTLEMENT?

Goldman has been the big end of month story for at least two months now and it could well be three.

As you may remember April went out with a bang as the SEC announced a civil lawsuit against the firm.

And by the end of May Wall Street was keep an ear open for more chatter about a settlement.

What must you know?

I’m hearing that this drags on a lot longer than a lot of investors think, reveals Anthony Scaramucci. The scuttlebutt is that the management is really looking to get the case settled but its hitting resistance from the government.


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TAKE YOUR POSITION: JOBS REPORT

Investors are preparing for the latest jobs report due out next week and according to Dow Jones, the median forecast among economist is a jump of 563,000.

If they’re right we’re looking at the largest job gain since 1983.

May Nonfarm Payroll Forecasts
HSBC +635k
Barclays +575k
Citi +550k
Morgan Stanley +525k
Deustche Bank +475k
Median +563k
Source: Dow Jones

What must you know?

The jobs report will likely move the market, explains Joe Terranova. And it needs to be good. If we get a bad employment report on Friday I’ll turn from bull to bear and say watch out down below.




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TRADER DISCLOSURE: ON MAY 28, 2010, THE FOLLOWING STOCKS AND COMMODITIES MENTIONED OR INTENDED TO BE MENTIONED ON CNBC’S FAST MONEY WERE OWNED BY THE FAST MONEY TRADERS; IUORIO OWNS (GE), (C), (FXC), (FXA),; IUORIO IS LONG VOLATILITY IN S&P FUTURES; TERRANOVA OWNS (FTO), (IPSU), (RSX), (PFE), (STLD), (TER), (APA), (YHOO), (AXP), (BMO), (BBY), (DIS), (XCO), (BTU), (SWN), (GLD); GRASSO OWNS (DCPA), (ASTM), (ABK), (BP), (BAC), (BGP), (C), (DYN), (JPM), (LPX), (NDAQ), (PRST), (CGP), (JPM); KARABELL OWNS (CSCO), (AAPL), (SLB), (GOOG), (BRCM), (C), (GS); ADAMI OWNS (AGN), (C), (GS), (INTC), (MSFT), (NUE), (BTU); SCARAMUCCI OWNS (GOOG); (GS), (KFT), (PFE); TERRANOVA OWNS (FTO), (IPSU), (RSX), (PFE), (STLD), (TER), (APA), (YHOO), (AXP), (BMO), (BBY), (DIS), (XCO), (BTU), (CVS), (IPI), (TEVA), (FXB), (GLD); KELLY OWNS (FXE) CALLS; KELLY OWNS (IBM) CALLS; KELLY OWNS (STD) CALLS

FOR STEVE GRASSO:
STUART FRANKEL AND ITS PARTNERS OWN (AMR)
STUART FRANKEL AND ITS PARTNERS OWN (BAX)
STUART FRANKEL AND ITS PARTNERS OWN (CUBA)
STUART FRANKEL AND ITS PARTNERS OWN (DHR)
STUART FRANKEL AND ITS PARTNERS OWN (DYN)
STUART FRANKEL AND ITS PARTNERS OWN (GERN)
STUART FRANKEL AND ITS PARTNERS OWN (GS)
STUART FRANKEL AND ITS PARTNERS OWN (HSPO)
STUART FRANKEL AND ITS PARTNERS OWN (MERC)
STUART FRANKEL AND ITS PARTNERS OWN (NWS.A)
STUART FRANKEL AND ITS PARTNERS OWN (NYX)
STUART FRANKEL AND ITS PARTNERS OWN (PDE)
STUART FRANKEL AND ITS PARTNERS OWN (PFE)
STUART FRANKEL AND ITS PARTNERS OWN (PRST)
STUART FRANKEL AND ITS PARTNERS OWN (RDC)
STUART FRANKEL AND ITS PARTNERS OWN (SYMC)
STUART FRANKEL AND ITS PARTNERS OWN (TLM)
STUART FRANKEL AND ITS PARTNERS OWN (TRV)
STUART FRANKEL AND ITS PARTNERS OWN (XRX)
STUART FRANKEL AND ITS PARTNERS OWN (SDS)
STUART FRANKEL AND ITS PARTNERS OWN (TBT)
STUART FRANKEL AND ITS PARTNERS ARE SHORT (QQQQ)

FOR ANTHONY SCARAMUCCI
SKYBRIDGE OWNS (GS)
SKYBRIDGE OWNS (GOOG)
SKYBRIDGE OWNS (KFT)
SKYBRIDGE OWNS (PFE)
SKYBRIDGE IS SHORT (WMT)

FOR JOE TERRANOVA
TERRANOVA WORKS FOR (VRTS)
TERRANOVA IS CHIEF MARKET STRATEGIST OF VIRTUS INVESTMENT PARTNERS, LTD.
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (AMKR)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (IGE)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (DBV)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (XLB)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (XLV)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (XLP)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (XLY)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (XLI)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (XLU)
VIRTUS INVESTMENT PARTNERS OWNS MORE THAN 1% OF (DRYS)

FOR PATTY EDWARDS:
EDWARDS OWNS (BP) FOR CLIENTS
EDWARDS OWNS (RIG) FOR CLIENTS
EDWARDS OWNS (MS) FOR CLIENTS
EDWARDS OWNS (JCG) FOR CLIENTS
EDWARDS OWNS (BKE) FOR CLIENTS
EDWARDS OWNS (COH) FOR CLIENTS
EDWARDS OWNS (COST) FOR CLIENTS
EDWARDS OWNS (WMT) FOR CLIENTS
EDWARDS OWNS (AZO) FOR CLIENTS
EDWARDS OWNS (HD) FOR CLIENTS
EDWARDS OWNS (WMFI) FOR CLIENTS
EDWARDS OWNS (V) FOR CLIENTS
EDWARDS OWNS (GOOG) FOR CLIENTS
EDWARDS OWNS (WFMI) FOR CLIENTS
EDWARDS OWNS (VXX) FOR CLIENTS
EDWARDS OWNS (GLD) FOR CLIENTS
EDWARDS OWNS (PGM) FOR CLIENTS

FOR BRIAN KELLY
KANUNDRUM CAPITAL OWNS (STD)
KANUNDRUM CAPITAL OWNS (IBM)
KANUNDRUM CAPITAL IS SHORT THE EURO
KANUNDRUM CAPITAL IS SHORT THE YEN
KANUNDRUM CAPITAL IS SHORT THE SWISS FRANC
KANUNDRUM CAPITAL IS SHORT THE BRITISH POUND

FOR RICHARD KANG
EMERGING GLOBAL ADVISORS OWNS (PTR) IN ITS FUNDS
EMERGING GLOBAL ADVISORS OWNS (PBR) IN ITS FUNDS
EMERGING GLOBAL ADVISORS OWNS (LFC) IN ITS FUNDS
EMERGING GLOBAL ADVISORS OWNS (BBD) IN ITS FUNDS
EMERGING GLOBAL ADVISORS OWNS (IBN) IN ITS FUNDS



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